The IRS released guidance indicating that no deduction is allowed for expenses that result in forgiveness of a PPP loan. This is not what was expected. The text of the law indicated that any forgiveness of the PPP loan was not taxable. The IRS agrees, but indicates that no deduction is allowed for expenses attributable to the debt that was forgiven. This ends up having the same result.
Based on the IRS notice, whatever amount of the PPP loan that is forgiven will increase the taxable income of the business. For example, if $100,000 PPP loan is forgiven, and you are paying tax at a marginal rate of 35%, your income tax liability will increase by $35,000 due to the disallowed expenses. What you really end up with is $65,000 of the loan was forgiven, and $35,000 was repaid through increased taxes.
If you have any questions, don’t hesitate to reach out to our team at Hungerford Nichols CPAs + Advisors.